We’re in the thick of tax season, and if you’re currently in debt with the IRS, or if you know that you won’t be able to pay what you owe this April, it’s time to consider your settlement options. There are multiple strategies to settle tax debt, but not all of these strategies are created equal—and not all will suit your needs. Learn which route might be the best-suited to your current financial situation and take steps towards a debt-free financial standing.
7 Ways to Settle Tax Debt
I get it. You’re freaked out because you can’t pay your taxes. To be honest with you, yes, this is a big deal. The good news is, you’ve got options. Let’s walk through them and see what’s best for you.
1) Installment Agreement
If you’re unable to pay off your tax debt in full, the IRS government may agree to an Installment Agreement, in which you’re expected to pay a pre-determined amount of your tax debt off every month. These IRS payment plans can be difficult to qualify for, but the IRS wants to get its money the easiest way possible, and may be amenable to this route. You must make these payments on time, and you have to be up-to-date on all past tax filings in order to qualify.
2) Offer in Compromise
If you’ve found yourself struggling under the weight of insurmountable tax debt, you might consider filing for an offer in compromise.
In this situation, you must prove to the IRS that you cannot reasonably be expected to pay off your debt in full. If the government agency determines that forcing your payment would cause undue financial hardship, they may provide in offer in compromise, which forgives a portion of your debt, allowing you to pay a reduced amount.
Before you get too excited about this option to settle your tax debt, understand that while this does happen…it doesn’t happen often. So, certainly give it a shot, but don’t be down in the dumps if it doesn’t work out for you.
3) Currently Not Collectible
If you’re currently unable to pay your taxes, your account may be deemed Currently Not Collectible. If you’re placed under this distinction, the IRS voluntarily agrees not to collect on the tax debt for a determined amount of time. You must show irrefutable evidence that you’re unable to pay your tax debt; if you can, this distinction can prevent or pause a tax levy, lien, or garnishment.
4) Paying Tax Debt with a Credit Card
This route sees you trade one debt for another, but depending on the credit card and its interest rates, this could be a wise move.
Paying off your tax debt with a credit card had its benefits:
- You can earn rewards or cash back if you own a rewards credit card
- This route gives you more time to pay your debt
- Your credit card fees may be tax deductible.
However, you must be sure that you’ll be able to tackle your credit card payments, or you’ll find yourself paying a lot more in interest over time. Take the time to create a new budget before signing up for a new credit card and making those tax payments.
5) Filing for Bankruptcy
In certain situations, bankruptcy may eliminate tax debt. However, filing for bankruptcy isn’t always a good option, especially if you’re only considering it to settle tax debt. Bankruptcy can destroy a credit score, and will force you to liquidate your assets.
6) Wait for the Statute of Limitations to Expire
This is the last resort— it takes the longest amount of time and is the least likely to occur. The IRS has 10 years from the date of assessment to collect what they’re owed from a taxpayer, which includes taxes, and any penalties or interest that may have accrued. Some taxpayers have successfully waited out the 10-year expiration date, but it’s a rare case or situation—and the consequences of letting your debt build up can be much worse.
7) Hire a Tax Professional
If you’re stuck and don’t know which route is best to settle tax debt, enlist the help of a tax professional who specializes in IRS tax relief. These individuals are experienced in various types of tax resolution methods, and give you a better chance of getting approved for many of the above options.
Finding yourself in hot water with the IRS is stressful, but it’s important to maintain a positive attitude. Taking the first step towards tax debt settlement will give you peace of mind and set you up for future success. Keep these options in mind if you’re battling tax debt and keep your head up.
So what about you? Which option is best for you to settle tax debt?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.